The Three R’s Of Effective Regulatory Reform

With tax cuts now a done deal, Republicans are turning to regulatory reform to give economic growth a further boost. There, they may find more bipartisan support. Past reforms of airlines, rail, and trucking regulation were, after all, set in motion by Democrats. 

Today, there is significant Democratic support for reform of financial regulation, especially as applied to smaller community banks. Overregulated small businesses can be found in every Congressional district, red or blue.

But while regulatory reform could be a big boost if it is done right, indiscriminate deregulation could do more harm than good.

Blanket deregulation won’t help

Many conservatives and libertarians seem to think the only good regulation is a dead regulation. If that were true, it should be possible to quantify regulation and measure the harm it does. However, attempts to do so have not been particularly successful.

Consider the regulatory freedom indexes published by the Heritage Foundation and the Cato Institute, which rank countries on a scale where a high score indicates greater freedom from regulation and a low score indicates a greater regulatory burden. Those scores correlate positively with GDP per capita and with broader measures of prosperity, such as the Social Progress Index and the Legatum Index of Prosperity. That tells us that countries with less regulation are, on average, richer and better off, but does it really support the notion that too much regulation is holding back the U.S. economy?

A closer look at the data shows that the United States already ranks high on the world scale of regulatory freedom. Its score is even better than would be expected, given its GDP. On the Heritage index, the United States ranks fourth-best of 131 countries, behind only New Zealand, Denmark, and Australia. According to Cato, it ranks sixth-best out of 143 countries, with only one OECD country, New Zealand, doing better. Given how lightly regulated the U.S. already is by these measures, it is hard to think that one or two more steps up the regulatory freedom rankings would be transformational.